Find how many times "bazooka" is mentioned in this article and win a prize......
September 24, 2008, 9:19 am Wall Street Journal
Paulson’s Bazooka: A Weapon to Be Remembered?
Treasury Secretary Henry Paulson returns to Congress today to sell his market bailout plan to House lawmakers, a day after his rough reception in the Senate. He’s surely hoping not to hear more about his famous bazooka.
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Paulson pulled the trigger on his bazooka. (Getty Images)
Back in July, Mr. Paulson took his request for authority to extend credit to Fannie Mae and Freddie Mac to the Senate Banking Committee with the plea that Congress not limit explicitly how much federal money he could have at his disposal. It was an unprecedented request, met with the disbelief that one might expect from asking Congress to give a blank government check to one official.
“If you’re not used to thinking about these issues it seems counterintuitive,” Mr. Paulson, a former Goldman Sachs chief executive, told lawmakers at the time. “But if you’re used to thinking about the issues, it is very intuitive. That if you’ve got a squirt-gun in your pocket you may have to take it out. If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out. … By increasing confidence, it will greatly reduce the likelihood it will ever be used.”
Of course, Congress didn’t offer a completely blank check but gave Mr. Paulson sweeping authority. He ultimately used that authority to execute a government takeover of the two mortgage giants this month.
Two months later, lawmakers still have the bazooka high on their minds. Mr. Paulson was back at the Senate Banking Committee with another request for unprecedented authority to carry out a $700 billion Wall Street bailout. Among the comments at a hearing Tuesday:
Sen. Charles Schumer (D., N.Y.), in making the case for starting with $150 billion to last into the next Congress in January: “I know ideally you’d like to just have as much as possible, but you’re not going to use $700 billion in these three months. It’s a huge sum of money, even $150 billion. And the confidence of the markets will be determined by how well it works initially, not by how much money you have in your pocket next to your bazooka.”
Mr. Schumer succeeded in drawing a few laughs from the packed hearing room. But they were just getting started.
Says Sen. Bob Corker (R, Tenn.): “I do want to remind you that the theory behind the bazooka was that if you have a bazooka in your pocket and the markets know that you have it, you will never have to use it. I would like to point out that you not only pulled it out of your pocket and used it, huge amounts of ammunition was pulled out of the taxpayer arsenal to solve that. I think you’ve done some very deft things and I compliment you on that, but the point is that things don’t always work out the way people, in their best efforts, think they’re going to work out.”
Later, Sen. Jon Tester (D., Mont.) weaved the bazooka mention into the windup for an unrelated question about government credit ratings: “It’s been pointed out about bazookas in people’s pockets, and the last housing bill we sent out. … You said, we need it; if I got it I probably am not going to have to use it. You had to use it.”
Even before the questioning, Mr. Paulson broke from his prepared remarks to preemptively address the bazooka question hanging over the room:
“To the comments made about Freddie and Fannie and the bazooka, you all can be darn glad you gave us the bazooka, because we needed it,” he said. “Let me tell you something. The root of that problem was in congressional charters, started many, many years ago. We were living up to our obligations here. … What we did was we came in, we stabilized the market, mortgage rates went down so that capital could flow through our system. And I can just say I for one, and I know that the other witnesses feel very glad about this, thank goodness that was done and they were stabilized before we had some investment banks report their earnings, or, let me tell you, this would be a much more serious situation than it is today.”
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Looks like congress won't be handing out what P&B are seeking. At least that is my guess. So we get a smaller package with strings attached.
Seems like P&B had hope to take the beach with a big $$$$$$$$$$$$$$$$$$$$$$$$$$$$$ headline, show max. strength (What is bigger than a bazooka?), go out and buy some stuff across the board at above market. Tell everyone the prices. Wait. Then, here is the hard part, banks start to believe they can clear this stuff and thus believing in each other enough to unfreeze the market. P&B wants all the cash upfront and no oversight because they don't want to go back to congress once people really know how they are doing it. If the banks won't start functioning, P&B will have to keep buying(?). Or maybe they have plan X and Z???
So what happens when P&B gets $150B? $80B was for AIG, that is like two AIGs? How much can P&B get the next time from congress, when they need it again? The market may ask is that a half-used bazooka in your pocket or what? Looks like deals must be cut with homeowners in foreclosures, or somethings along that line. So how do you make sense buying above market and cutting deals with foreclosures at the same time to congressional accountant types? For the market to work like before, bankers and investors have to believe the solution is workable. |
